Take advice on implications of Covid-19 on leases

If you are a commercial landlord or tenant, it is likely that you have been affected by the complications concerned with your lease during Covid-19.

Along with the Alert Level changes and now the different stages within each level, your lease is just another aspect to consider in operating your business.

Temporary law changes were introduced by the Government effective as of April 1 last year as part of the Covid-19 response. Notice periods given to commercial tenants for overdue rent were extended from 10 working days to 30 working days before eviction.

There was also temporary relief introduced for landlords with mortgages to pay with lenders now having to give 40 working days’ notice rather than 20 working days to catch up on overdue payments before a lender could enforce the mortgage.

The objective was to give the parties more time to discuss how they would both get through this challenging period.

Most recently the Government has introduced a Bill in Parliament to introduce a further temporary law change which will require a “fair proportion” of rent otherwise payable during an affected period to cease to be payable.

This will apply in an epidemic and where a lessee is “unable to gain access to all or any part of the leased premises to conduct fully their operations in all or any part of the leased premises, because of reasons of health or safety related to the epidemic”.

However, the landlord and tenant would need to effectively come up with an amount that is considered “fair”. Where agreement cannot be reached, the parties must use arbitration.

The temporary law would apply only to those leases that did not already provide for adjusted rent payment terms (or contribution to outgoings) during an epidemic. The parties can also agree that the clause does not apply.

This legislation, once passed, will be backdated to start on September 28, 2021.

The current temporary law change proposed is an attempt to provide a mechanism for negotiation between parties where no other option has been provided under a lease.

More recent commercial leases are based on the Auckland District Law Society form and recent versions include clause 27.5 “no access in emergency” which was added in 2012 as a result of leasing issues following the Canterbury earthquakes.

The clause was tested in the recent High Court case of Mountfort, Mountfort and Foster v Cheam. The case involved a lease of a bakery in 2020 where the tenant failed to pay rent for a period and then underpaid for a further period due to a reduction in customers once back in the premises.

The tenant was issued a notice for cancellation of the lease. However, the court held among other matters that clause 27.5 was only about “access” and that the clause did not apply in Alert Level 1 and 2 where there was “access” and therefore, the rent was still owed for this period.

There are so many more factors other than just “access” to consider in relation to the impact on a business in Covid-19 such as the type of business, the varying level of operations at different alert levels and whether storage of servers is partial access. There are also many leases that do not have clause 27.5 being earlier versions of the ADLS lease or other forms of lease.

However, it will be challenging for parties to decide what a “fair proportion” of rent is. Some of the factors to consider by the parties negotiating could be:

- The extent of use of premises during the applicable period.

- The landlord’s finance repayment obligations.

- The proportion of the tenants business revenue unaffected.

- Use of government subsidies and incentives.

- Outgoings still being paid by the landlord.

- The need to keep in good relations with tenants.

We would recommend that you take advice on the implications of Covid-19 on your commercial lease earlier rather than later regarding your existing lease or when entering a new lease.

Likewise, if you have a renewal or rent review coming up now would be a good time to negotiate and discuss options given Covid-19 is not going away anytime soon.

- Nadia McKenzie is an associate with Marks & Worth Lawyers and specialises in commercial and property law including leasing.


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